A Lobbying Approach to Evaluating the Sarbanes‐Oxley Act of 2002

TLDR

The study evaluates how the Sarbanes‑Oxley Act affected shareholders by analyzing the lobbying actions of investors and corporate insiders that shaped the final rules. The authors identify firms most affected by SOX as those whose insiders lobbied against strict implementation and analyze their lobbying behavior to assess the law’s impact on shareholders. Investors overwhelmingly lobbied for strict SOX implementation, while insiders and business groups opposed it; firms whose insiders lobbied against strict rules—characterized by agency problems—experienced about 7 % higher cumulative stock returns before passage and continued to perform well afterward, supporting the view that SOX reduces agency problems.

Abstract

ABSTRACT We evaluate the impact of the Sarbanes‐Oxley Act (SOX) on shareholders by studying the lobbying behavior of investors and corporate insiders in order to affect the final implemented rules under SOX. Investors lobbied overwhelmingly in favor of strict implementation of SOX, while corporate insiders and business groups lobbied against strict implementation. We identify firms most affected by the law as those whose insiders lobbied against strict implementation. Such firms appear to be characterized by agency problems, rather than motivated by concerns over compliance costs. Cumulative stock returns during the five and a half months leading up to SOX passage were approximately 7% higher for corporations whose insiders lobbied against SOX disclosure‐related provisions than for similar non‐lobbying firms, consistent with an expectation that SOX would reduce agency problems. Analysis of returns in the post‐passage implementation period suggests that investors' positive expectations with regards to the effects of these provisions were warranted.